9911796707
TMI Blog2016 (9) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the financial year 2006-07, Tega India set up Tega (investment Ltd; Bahamas, an associated enterprise (AE) (therein referred to as Tega Bahamas) as a special purpose vehicle (SPV) in the Bahamas for undertaking an acquisition of companies based in South Africa, that is, to acquire, (1) Berue equipment Ply Limited; and (2) Bentod Manufacturing Limited. In order to acquire these two South African Entities, the assessee provided a shareholder loan to Tega Bahamas and a corporate guarantee to ICICI Bank UK. The assessee filed its return of income for assessment year 2008-09 declaring a total income of Rs. 275,777,558/- on 29.09.2008. Along with the return of income, the assessee had filed Form 3CEB reflecting international transactions. These international transactions were referred by the AO to the TPO under section 92CA(1) of the Income Tax Act. The TPO in the order dated 31.10.2011, passed under section 92CA(3) of the Act, proposed an upward adjustment of Rs. 900,979/- for providing corporate guarantee and an upward adjustment of Rs. 2,883,461/- for providing interest free loan. 3. Although in this appeal, the assessee has raised multiple grounds of appeal but at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not], or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. [Explanation - For the removal of doubts, it is hereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or" In this case the Tega Industries Ltd. holds, shares carrying not less than twenty-six per cent of the voting power in the Tega Investment Ltd-Bahamas and furnished guarantees not less than ten per cent of the total borrowings of the Tega Investment Ltd-Bahamas, hence Tega Investment Ltd-Bahamas is an associated enterprise (AE). It is clear from the above cited discussion that there is an international transaction and there is relationship of an associated enterprise (AE), between Tega Industries Ltd. and Tega Investment Ltd. Bahamas therefore an arms length price of transactions may be computed. Transfer Pricing Study (TP-Study Report) The assessee under consideration has conducted a Transfer Pricing Study (TP-Study Report) in respect of the said loan transaction which reads as under: "5.02.1. Selection of the "Most Appropriate Method" The Indian transfer pricing legislation requires taxpayers to select the method that under the facts and circumstances, provides the most reliable meas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wings analyzed 381 The above stated data was analyzed and data such as amount of loan, period on loan, rate of interest etc. was collated thereafter, out of 381 borrowings analyzed, 361 borrowings were rejected on one of the following reasons: * Insufficient information specially pertaining to rate of interest; * Only approximate rate of interest provided. * Controlled transaction. * Interest rate not denominated in LIBOR, and * Transactions undertaken in years other than financial years 2006-07 and 2007-08. Hence a total of 20 borrowings were selected as being functionally comparable to Tega India in respect of its transaction relating to receipt of interest from its overseas affiliates. A summary of the 381 borrowings, identifying the 20 accepted and 361 rejected borrowings, along with reasons for acceptance/rejection is enclosed as an Annexure 6. 5.02.03 Findings and conclusion A summary of the findings in respect of comparable borrowings identified in tabulated below: Name of Company Amount Borrowed (million) Rate of interest (percent over LIBOR) Bajaj Hindustan Limited USD 80 0.65 CEAT Limited USD 10 1.6 Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ega Bahamas. The assessee had also provided loans (interest free) to its AEs in Australia (Tega Industries Australia Pty Ltd.-Tega Australia) and USA (Tega Industries Inc.-TegaUS). However, at the time of documentation, the assessee, suo motu offered interest for such loans provided @ LIBOR + 100 hps) on the basis of a bench marking exercise undertaken by it. However, the ld. TPO disregarded the assessee's above cited contention for the provision of loans and computed an additional charge for interest free loans at Rs. 2,883,461, observing the followings: "24. The next issue concerns the determining of the spread based on the risk profile. A Loan Connector' tear-sheet of Thomson Reuters IPC shows that a USD 64.4 million loan for the short term of 14 months issued in March 2004 to Revlon Inc. of USA had carried a spread of 500 bps over LIBOR. The S&P debt rating was 'CCC'. Allowing adjustments for the size of loan and year, it can be safely considered that the company with a size and functions of TILB would have been offered a spread size of around 6% for a long-term unsecured loan. Accordingly the arm's length price of the loan advanced by the assessee to TI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged by the bank represent the price of the loan based on its estimation of the creditworthiness of the borrower the term of the loan and conditions associated with it including the currency and country risk, if any. However, in the present case, the arm's length price of the loan is to be determined in the hands of the assessee, a company, and not a leading bank. It follows that in its case, the LIBOR would have to be replaced by the cost of funds in the foreign currency involved in the hands of the company. On the other hand, the spread would have to be determined on the basis of an analysis of the creditworthiness of the borrower and the attached conditions of the loan etc. We agree with the reasoning of the TPO and uphold it. 5.1.14 In para 7.2 of the remand report the TPO has given reply to the objection of the Assessee that the cost of funds in the hands of the assessee should be the cost of their foreign currency funds. The relevant paragraphs from remand report are reproduced below- In fact, it is mentioned in the Transfer Pricing Order (paragraph 18) that: "... in case of an Indian company giving a loan to a company abroad, the price of the loan would be the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national norms as far as possible. We completely agree with the TPO and confirm the same. 5.1.16 In respect to the objection raised by the Assessee that the TPO has computed interest on loan given to Tega Bahamas for the whole year whereas loans outstanding for less than a year the TPO has given the reply in para 8.2 that the computation has been checked and if is seen that the Excel sheet has applied the formula for the whole year. The TPO is not very clear as to what does he mean by that. However, we are of the view that interest should be charged for actual period in a financial year and not for the whole year. It is therefore, directed that the TPO will calculate the interest chargeable for the number of days for which loan was outstanding. It cannot he for the whole year. 6.1 We conclude by saying that we concur with all the arguments of the Toothed. Assessee has not convinced us that it deserves any relief in respect to any ground of objection. With this all the grounds of objections stand decided by the DRP. Except the direction that the TPO will charge interest on loan for the number of days for which loan remained outstanding during the relevant. Financial Year, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified: (ii) such price is adjusted to account for differences. If any between the international transaction and the comparable uncontrolled transaction in between the enterprise entering into such transactions, which could materially affect the price in the open market: (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction emphasis added." Even Australian Taxation Ruling 97/20, para 3.10, page 37 of 72, defines the CUP method on the same lines. "3.10 The CUP method compares 'the price for property or services transferred in a controlled transaction to the price charged for property or services in a comparable uncontrolled transaction in comparable circumstances' (1995 OECD Report, paragraph 2.6, examples of the method appear in paragraphs 2.0 to 2.13 also TR 94/14, paragraphs 88 to 93 and 353 to 358)." Therefore, in application of CUP as the most appropriate method, the loan instrument (the price charged for pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Currency Country Currency Tega Industries Ply. Ltd. (Australia) Australia USD/AUD India-has lower rating than Australia USD Tega Bahamas/South Africa South Africa USD India-has similar rating to South Africa USD Tega Industries Inc (USA) USA LSD India has lower rating than SA USD It is submitted that if a CUP is being applied for financing transactions with companies, the information relating to each of the associated enterprise, i.e. the country of the borrower, currency of the loan, credit rating of the borrower, fixed or floating nature of the loan and other key terms and conditions need to be factored. The said approach has been followed by the assessee. However, the ld. TPO rejected the scientific analysis undertaken by the assessee. The ld. TPO maintained that CUP as the most appropriate method and while applying the CUP method as the most appropriate method for benchmarking financial transactions, there would be no concept of tested party. (Refer pages 10 & 11 of the TP Order. Exhibit I of the paper book). To search for comparable borrowing arrangement the assessee used ECBs of major Indian companies and arrived at an arm's length interest ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis i.e. currency risk. Without prejudice to our arguments, regarding incorrect application of method by the ld. TPO and rejection of comparable transactions identified by the assessee, the ld. TPO erred in not accepting the assessee's foreign currency cost of borrowed funds. 3 While determining the credit rating of the assesses, the ld. TPO selected certain ratios while ignoring others. The ld. TPO cherry-picked two of the seven ratio's recommended under the S&P model for arriving at the AE credit rating. 4 Arbitrary adjustments to the credit rating arrived at based on the ratios selected by the ld. TPO for reducing the credit rating. The ld. TPO after selecting the ratios for ascertaining the credit rating of the AEs of the assessee, arbitrarily downgraded the ratings arrived at after adopting the cherry-picked ratios. The same can be referred to on pages 19, 20 and 21 of the TP order (enclosed as Exhibit E to the paper book) where the rating of Tega US was downgraded from a BBB to B. Further, the assessee would also like to place reliance to the ITAT Rulings, Income Tax Appellate Tribunal Bench 'A' Chennai, ITA No. 2148/Mds/2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g process the ld. TPO erred in the methodology adopted and in doing so computed an additional charge on the guarantee and loan provided to Tega US and Australia. The errors committed by the ld. TPO while undertaking the credit rating exercise have been produced below: "(1) The Ld TPO has taken the assessee to be the tested party and inadvertently applied CPM method to compute the arm's length rate of interest; (2) In considering the assessee to be the tested party, the ld. TPO has taken the assessee cost of funds to be the base rate instead of DBOR. (3) Further, the TPO in assessing the creditability of the AEs has used the S&P Criteria in a biased and unscientific manner and have has committed the following errors. a. The ld. TPO has only placed reliance on two out of seven ratios as prescribed by the S&P Criteria to arrive at the credit rating for AEs. b. The ld. TPO has further downgraded the rating that was arrived at post the credit rating exercise, without application of any sound principles for doing so. (4) Further, while identifying comparable uncontrolled loan instruments for computing the margin to be earned over and above the base rate based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ega Australia and Tega US are BBB and AA respectively, vis-a-vis 'BB' and 'BBB' as computed by the ld. TPO. Further, the ld. TPO has on the basis of inadequate understanding of the S&P Rating guidelines further downgraded the rating that was arrived at on the basis of size and scale considerations. The relevant extract of the S&P Credit Module has been provided below for your ld. Panel's consideration. "Standard & Poor's has no minimum size criterion for any given rating level. However, size turns out to be significantly correlated to ratings. The reason size often provides a measure of diversification, and/or affects competitive position. Small companies also can possess the competitive benefits of a dominant market position, although that is not common. Obviously, the need to have a broad product line or a national marketing structure is a factor in many businesses and would be a rating consideration. In this sense sheer mass is not important; demonstrable market advantage is. Market-share analysis often provides important insights. However large shares are not always synonymous with competitive advantage or industry dominance. For instance, if an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the above literature, it can be seen that there is no reference to the ld. TPOs contention that the credit rating for smaller companies would require to be downgraded. Hence the ld. TPG has erred by downgrading the AEs ratings based on these their small scale of operations. For identification of the uncontrolled loan agreements the assessee followed a scientific approach. To initiate the search process, the relevant characteristics of the international transaction were identified based on which similar loan transactions were searched for on the database. The key characteristics identified were: Particulars Strategy Proposed (Australia) Strategy Proposed (United States) Borrower Region Australia United States Deal Active Date 1 April 2007 to 31 March 2008 1 April 2007 to 31 March 2008 Status Phase Completed, Mandated Completed, Mandated Deal Amount Less than 10 million USD/AUD Less than 10 million USD Tenure Revolver/Line>=1 Yr. Revolver/Line>= 1 Yr. Structure Unsecured Unsecured Currency/Amount deal Currency US dollars/AUD US dollars Rating (S&P: BBB+, BBB, BBB-) (S&P: AA+, AA, AA-) However, these resulted in insufficient comparable loan t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. TPO he quashed and the arm's length price as determined by the assessee be accepted. In spite of the above cited submissions by the assessee, the ld DRP has confirmed the order of TPG. Being aggrieved from the order of the Dispute Resolution Panel, the assessee is in further appeal before us. 4.2 The ld. AR for the assessee has vehemently submitted before us that with respect to provision of interest tree loan to Tega US and Tega Australia, the assessee humbly submits that it has undertaken an interest benchmarking study applying CUP as the most appropriate method in its TP study report and determined the arm's length interest rate to be LIBOR plus 100 bps. The relevant para of transfer pricing study (TP-Study Report) as cited above, proves this fact. The ld. TPO during the course of the hearing proceedings rejected the assessee's approach by stating that for determining the arm's length interest rate on loan provided, comparable instruments would comprise of similar uncontrolled transactions where loan has been provided in the same foreign currency by some Indian entity to any entity in the same foreign country in which the AF is situated under similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. For benchmarking the interest rate on loan, either an internal CUP or an external CUP in the same priority of application could have been applied in a case. An internal CUP could be applied where same/similar transactions (i.e. with same/similar terms and conditions) have been entered into by the appellant/AE with third parties. If no internal CUP is available, an external CUP could be looked at i.e. transactions entered outside the group between third parties under same/similar terms and conditions. To illustrate, if the price charged in the open market for a particular type of product could be say INR 100. In order to manufacture that product a person incurs a cost or INR 105 or INR 60. The market pays INR 100 only as the market price is INR 100 and not INR 105 or INR 60 i.e. the cost incurred by him. In order to benchmark the transaction under CUP method, a comparable price should be considered which is being charged by other parties in the open market. In this regard the appellant again reiterates the fact that LIBOR should be considered as base rate for determining the comparable uncontrolled price as LIBOR is in general used by the lenders in order to charge a rate of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the credit rating for AEs even after acknowledging the fact that S&P prescribes all seven ratios. Considering, the above mentioned flaw in the ld. TPO's approach the appellant undertook the credit rating process on a suo motu basis placing reliance on the same S&P Criteria as referred by the ld. TPO. The steps to determine the credit ruling by the assessee were as under: (1) Pursuing the financial statement of Tega Australia and Tega US for computation of all seven ratios as prescribed by the S&P Criteria to arrive at the credit rating. (2) Evaluating the rating arrived with sovereign rating to cap the same as any company rating could not be more than its country sovereign rating. The credit rating methodology as adopted by the assessee provided the 'BBB' rating for Tega Australia and' AA' for Tega US. (Submission before DRP dated 14 June 2012, Page 313 to 320 of the paper book) The ld. TPO has further downgraded the rating arrived at after using the ratios in a biased manner citing the following subjective qualitative criteria: (1) Credit rating could be determined under 'Model driven ratings' which considers only the quantitative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove the base rate respectively for US and AUD denominated loans. As assessee had charged interest at the rate of 100 bps over the base rate, the same could be considered to be at arm's length. In determining the quantum of spread that a B rated bond or company would command over and above its base rate for the risk associated with the loan transaction, the ld. TPO has identified a single loan transaction as comparable from 'Loan Connector' having 'B' rating commanding a spread of 3% for the risks associated with its rating. Following evaluation of credit rating for the purpose of determining arm's length guarantee charge and interest rate for provision of guarantee and loan, the ld. TPO then identified a single loan transaction as comparable from 'Loan Connector' having B rating and commanding a spread of 3% for the risks associated with its rating. First of all, any search for instruments bearing B rating should not be undertaken as the rating determined herein is 'BBB' rating for Tega Australia and 'AA' for Tega US (determined TPO's S&P approach in an unbiased manner) rather than uniform rating of B as already explained herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. TPO mentioned that the same needs to be based upon the creditworthiness of the borrower, citing detailed explanation about credit rating, the agencies determining the same and Standard & Poor's Corporate Rating Criteria as provided by them in a booklet issued in 2006 (S&P Criteria). However, the ld. TPO erred in applying the same in a biased manner and came to a conclusion that the rating of Tega US and Australia would not be more then 'B'. Following the approach as provided in S&P Criteria, the ld. TPO moved on to arrive at a credit rating of Tega US and Tega Australia for computation of credit spread. The ld. TPO assigned a credit rating of 'B', following a biased and unscientific application of S&P criteria, and determined 300 bps as credit spread to be applied on base rate. The assessee would humbly like to highlight that the ld. TPO has followed a biased and unscientific manner of deriving the credit rating which has led to commit the following errors: a. The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S&P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S&P prescribes a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating should only be based upon quantitative factors as mentioned in the S&P Criteria. Thus, the approach of the ld. TPO to assign a uniform B rating to Tega US and Tega Australia comprises of fallacies and the biased approach. b. Further, as already mentioned by the appellant that rating methodology by S&P is based on manual computation of ratios thereby leaving a scope for human intervention and manipulation, the appellant would also like to submit the credit rating report generated from Moody's RiskCalc software for Tega US and Tega Australia as part of additional evidences (Page 8 to 20 of Additional evidences) which provides rating through use of computer base algorithm vis-a-vis manual compulation of ratios. The appellant pleads to consider the same for avoidance of any scope for manipulation. On perusal of the said credit rating report it has been determined that Tega US could be rated as Bal (Page 8 to 15 of Additional evidences) and Tega Australia could be rated as Baa2 (Page 16 to 20 of Additional evidences). The appellant has further undertaken a search on Loan Connector database for the said ratings to identity comparable uncontrolled US and AUD denominated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an credit spread of 52 bps (Page 37 to 38 of Additional evidences). Thus, this evidences the fact that single instrument of 300 bps is an erroneous conclusion drawn by the ld. TPO on facts and circumstances of the case and should be disregarded by your Honours. Further, the appellant would also like to submit herein that the US and Australian entities are 100% captive subsidiary of the appellant and undertakes distribution of appellant's products in US and Australian markets. Thus, these subsidiaries were of high importance to appellant for expansion of its business in key global markets and could be considered as 'core' subsidiaries. The appellant has provided them with working capital loan, payable on demand and for the purpose of evaluation of arm's length interest rate, credit rating of appellant for FY 2007-08 could be considered appropriate for identifying comparable loan instruments. The appellant rating for March 2008 has been determined to be as Bal (Page 1 to 7 of additional evidence). The appellant undertook for comparable loan instruments in USD and AUD from Loan Connector database and determined the same to be as base rate plus 72.68 bps (Page 34 to 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same needs to be based upon the creditworthiness of the borrower, citing detailed explanation about credit rating, the agencies determining the same and Standard & Poor's Corporate Rating Criteria as provided by them in a booklet issued in 2006 (S&P Criteria). However, the ld. TPO erred in applying the same in a biased manner and came to a conclusion that the rating of Tega US and Australia would not be more then 'B'. The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S&P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S&P prescribes all seven ratios. ld. TPO has identified a single loan transaction as comparable from 'Loan Connector' having 'B' rating commanding a spread of 3% for the risks associated with its rating therefore, we find that the methodology adopted by the TPO may be wrong. However, the assessee has submitted before us some additional evidence pertaining to credit rating. As we noticed in the additional evidences that the assessee has computed credit rating of Tega Australia at "BBB" and Tega US at "AA" by applying scientific and logical method, as explained above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee company 37. It is seen that it has not been brought to light (hat the corporate guarantee provided by the guarantor is in the nature of provision of service. Further, in any way. it has a bearing on the profit or losses of the Transacting parties. On both grounds, it is covered under section 92B of the Act, Neither this nor the OECD Guidelines or international vast law referred above appears to have been brought to the notice of the Hon'ble Tribunal. 38. The Hon'ble Supreme Court has laid out on many occasion that an issue decision has been discussed in detail in a judicial pronouncement if cannot make good law. In the case of Shanmugavel Nadar v. State of Tamil Nadu (263 TTR 658), the Apex court has pronounced the following: "Rup Diamonds v. Union of India. AIR 1989 SC 674 is an authority for the proposition that apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum, resulting in refusal of exercise of its jurisdiction which was invoked, could not by itself be construed as the imprimatur of the superior forum on the correctness of the decisions Sought to he appealed against. In Supreme Court Employees Welfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of 'very high credit risk' It has been shown that TILB should be charged a margin of 600 bps, However, it has been charged a margin of 225 bps This difference is required to he shared between the guarantor and the borrower in an arm's length situation. However, the bargaining power of TILB vis-a-vis the assessee is minimal in an arm 's length situation. Thus, 250 bps could he safely considered the price of the guarantee. 42. Based on the above, it is held that the assesses should have charged a Guarantee commission at the annual rate of 2.5% on the amount of credit availed by the subsidiary which was guaranteed by it. The loan amount stood at Rs. 3,60,39 150-as on 31-3-2008 Accordingly, the guarantee fee is computed at Rs. 9,00,97/- Thus, the total income of the assesses is to be upwardly adjusted by this amount.' 5.1 Aggrieved from the order of the TPO, the assessee filed an application before the Hon'ble DRP. The Hon'ble DR.P has also confirmed the action of the TPO by observing the following: "5.1.6 The Assesses has submitted in the reply to the remand report that from the facts as already presented and discussed before the ld. Panel Membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price as two unrelated parties transacting at Arm's length do. In this background if we see what is the structure of the international transactions entered into by the Assessee with the AE, we find that they are interest free loan and Corporate Guarantee given to ICICI UK bank on behalf of the AE this is the structure of the transactions then the assessee must charge interest on loan and Guarantee fee from AT. If Assessee does not do so it leads to erosion of tax base as third parties charge interest and fees for such services Therefore this Panel holds the view that the TPO was right in making adjustment in the TP Order on this account. There is no scope in our view to restructure the international transaction of interest free loan as Shareholder service or quasi-equity. Restructuring should be the judicious discretion of the Tax Administration and it could be applied only if the Assessee had claimed expenditure for interest or fees on Guarantee. In this case facts are different and interest and Guarantee fees adjustment made by the TPO are in the nature of income and not expenditure." Being aggrieved from the order of the Hon,ble DRP, the assessee is in further appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. The assessee is of the view that as the purpose of setting up of Tega Bahamas was to facilitate the acquisition of the South African entities, its expectation from the loan funds provided to Tega Bahamas and the guarantee provided for the third party borrowings of Tega Bahamas was not to earn an interest income or a guarantee fee. The assessee believes that in a third party scenario no entity would have lent any funds to Tega Bahamas given its skewed debt - equity ratio evident from its balance sheet and thus, the basis of providing funds to Tega Bahamas was as an investment and not as loan. Thus, it would be appropriate to classify the funds loaned and guarantee provided to infuse third party funds as quasi-equity in nature and as a shareholder service meriting no consideration. vi. The assessee has referred to UK Manual INTM 501010 issued by 'IMRC' which deals with the case of a UK lender and guarantor. The assesses has then mentioned that the UK Transfer Pricing Legislation further provides guidance as to how one could decide whether a loan or a guarantee provided for a loan is quasi-equity in nature or a shareholder service. This assertion is based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses (c) (d) and (g) of paragraph 60 of the Ruling allows for recharacterisation of loan as equity. xiii. It is mentioned the TPO has rejected the arguments of the assessee by storing that 'thin capitalisation' rules are not provided in Indian legislation. The assessee has stressed that thin capitalization rules stem from the arm's length principle and they were "introduced across the world to cheek lopsided capital structures that were employed by multinational corporations to enable profit extraction from their AEs in the form of interest". The assessee has referred to HMRC INTM 542005 where it has been mentioned that thin capitalization is a form of transfer pricing." Based on the above, the ld.AR for the assessee has submitted before us that the TPO's determination of arm's length price of the guarantee fee is erroneous. Ld. AR also submitted that assessee's expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market rate of interest or guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, help it to achieve acquisition of Tega Beruc for furtherance of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assesses, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are Quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs, unfortunately, both of these things leave a lot to be desired. ITAT can only hope, and ITAT do hope, that things will change for better." (Para 51) Based on the above cited facts and case law, the ld AR for the assesses has prayed before us to treat the guarantee as shareholder activity and therefore the addition made by the TPO/AO may be deleted. 5.3 On the other band the ld. Departmental Representative (DR) has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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